A recent article in the New York Times titled “Banks Making Big Profits on Small Loans” has been making the rounds in the microfinance community. When major media outlets like the Times cover microfinance issues, they tend to paint a picture in broad, but accurate, strokes. Generally, the topic is complex and nuanced and condensed into a thousand words or less, leaving many issues unaddressed. Microfinance, like sea turtles and curling, does not generally attract the attention of non-enthusiasts. So when an issue does make it to the second-most emailed spot on the NYT website, everyone with (or, in my case, without) a serious readership gives a response. The CEO of Kiva, David Roodman of the Center for Global Development, Alex Counts, director of the Grameen Foundation, and Change.org (not Change.gov, unfortunately) have all shared their thoughts. The article and subsequent responses from the microfinance community touch on a lot of broader issues. With that in mind, I’ll share some thoughts as well.
For one thing, the New York Times article, like those of other mainstream publications, correctly highlights a deficiency in the practice of microfinance. But usually the authors use specific case studies to draw general conclusions about the industry. Back in August, the Wall Street Journal highlighted the microfinance industry of one community India. Using the example of an urban slum , the author discusses how the success and subsequent visibility of microfinance is generating a credit bubble. Here, the author explains the reason:
Some observers blame a fundamental shift in the microfinance business for feeding the problem. Traditionally, microlenders were nonprofits focused on community service. In recent years, however, many of the larger microlending firms have registered with the Indian central bank as a type of for-profit finance company. That places them under greater regulatory scrutiny, but also gives them wider access to funding.
Well, yes, that’s partially true. Banks and other lenders are beating down the door of the top-performing microfinance institutions (MFIs) across the world, giving more liquidity to the recipients and generating more competition for clients between the organizations. With more money in the market, clients have less incentive to pay back their loans, since they know they can just get a loan from another MFI if they default. In the case of this community in India, it is clearly a problem. But this is a specific urban slum with a high population density in a country with a microfinance industry that has been flourishing for years. Extrapolating conclusions about the world microfinance community risks mischaracterizing what is happening in other countries. In most countries, this availability of funds has hardly created a “bubble.” A greater number of potential investors allow MFIs to negotiate better interest rates, passing the savings onto the clients. In areas with underdeveloped microfinance industries, access to capital allows for expansion, meaning more poor people have access to credit. During the economic crisis, in particular, access to capital is one of the main concerns of microfinance managers. To be fair, the article refers to a single slum and uses it to make a larger point about India. But the author includes data like this in his argument:
Over the past year, investors have poured more than $1 billion into the largest microfinance funds managed by companies, a 30% increase. The extra financing will allow the industry to loan out 20% more this year than last, much of it to countries such as the Ukraine, Cambodia and Bosnia, CGAP says.
If I were analyzing the argument, it would not be unreasonable to assume that the author is making a point about global microfinance – an oversimplified and misguided one, to be sure. It is difficult to generalize about microfinance as a whole because the practice is country-specific. In the New York Times article, the author talks about two key issues: high interest rates among MFIs and the efficacy of microfinance. I will discuss the latter in another post. For the former, he cites organizations in Mexico and Nigeria. First of all, MFIs in Mexico – Compartamos, Te Creemos, etc. – have among the highest interest rates in the world. In Nigeria, the cost of doing business is also atypically high, compared with other countries. Alex Counts, CEO of Grameen Foundation, explains the pitfall in using these two examples:
His sweeping generalizations about interest rates, while focusing on just two countries, could lead the average reader to believe that rates above 80 percent are the norm. This is far from the truth, as evidenced by a recent report by the Consultative Group to Assist the Poor that found that, on average, sustainable microlenders were charging 26 percent. (Grameen Bank, our model for microfinance efficiency, charges rates from 8% to 20%, and gives interest-free loans to the ultra-poor as a transitional strategy to get them ready for regular borrowing.) The same report also noted that rates have been falling by 2.3 percent annually and that less than one percent of microfinance clients worldwide actually pay rates as high as those cited in the article. Moreover, in most of the 36 countries studied, microfinance interest rates were below the rates charged on consumer credit cards, which is an appropriate benchmark.
It is importance to look at everything in context. In the case of the Wall Street Journal and the New York Times articles, the take-home points are not always consistent with reality. The CEO of Women’s World Banking, a major microfinance network, responded to the article in letter to the Times:
Ensuring that interest rates are high enough to recoup the costs of lending without gouging the poor is a critical issue for the entire microfinance industry. While pointing out that many MFIs charge disturbingly high interest rates, the article discusses little of what is being done to reduce them.
There are many ways to bring microfinance interest rates down including reducing operating costs through the use of technology and increasing competition and transparency. In mature microfinance markets like Bolivia, for example, where clients are offered a wide selection of products and providers, interest rates have steadily declined.
Her response is representative of the microfinance community. Not every microfinance market is the same, and generalizing risks mischaracterizing its participants. The premise of the Times article is sound, but the conversation needs to be taken further. The debate sparked on the Internet is a healthy one, but unfortunately it now exists in the echo chamber of the experts.